VERSACE: Economic reports muddle recovery predictions

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By Chris Versace

OPINION/ANALYSIS:

We continue to get mixed results about the economy from both economic data streams and company earnings.

On the one hand, management teams of some companies, such as Cisco and Whole Foods, are saying their respective businesses are turning the corner. Even so, we are not out of the woods yet, Toto - for even while Cisco noted improving trends for its business, CEO John Chambers noted that concerns about the strength of the global economy remain, citing "uncertainties regarding the strength and shape of the recovery."

Also, we have heard more news on corporate layoffs from the likes of Microsoft, Time and Sprint-Nextel.

This follows the monthly ADP-Macroeconomic Advisers national employment report that was released midweek and showed that private-sector jobs in the U.S. fell by 203,000 in October. Although this was better than the 227,000 jobs lost in September, the October results, combined with continuing jobless claims at more than 500,000 per week, is but the latest confirming sign that we are in for a protracted recovery.

One concern I have is how the recent bankruptcy of CIT Group and the continued tightness among banks when it comes to lending will affect small and medium-sized businesses, particularly those with lumpy or volatile cash flows. The risk is that even in an economy that has stabilized, the cash-flow volatility of these businesses that are not backstopped by a funding source for working capital needs - seasonal or otherwise - could result in additional layoffs in the coming weeks and months. Again, it's a concern, and given the expectation voiced by ADP that it does not see the unemployment rate peaking until sometime in the second half of 2010, I am not alone in my concerns. Currently, unemployment stands at 9.8 percent, the highest since 1983, and pundits predict it will reach 9.9 percent when new figures for October are released, set for Friday.

It comes as little surprise, then, that the Senate has voted to extend unemployment insurance by 14 weeks for jobless people who have exhausted their benefits. Moreover, in the 27 states, plus the District of Columbia and Puerto Rico, that have unemployment rates of 8.5 percent or higher, the jobless will receive an additional six weeks of benefits. Naturally one of the first questions that runs through my mind is, where will the additional funding come from to support this latest program extension amid a record federal budget deficit? Unemployment insurance payments, which average $308 per week, usually expire after six months, but Congress has already extended them twice.

Some economists theorize these benefit payments will act as an economic stimulant because "they are spent quickly and help the jobless avert foreclosure and bankruptcy." Now, the theory is always interesting, but will be nice to see whether the real world data matches up against the theory. Per the most recent Bureau of Economic Analysis data, personal savings as a percentage of disposable personal income was 3.3 percent in September, compared with 2.8 percent in August. A rise in personal savings can hardly be called a surprise. People are obviously concerned about the state of the economy given the aforementioned unemployment rate and the amount of personal savings that has been wiped out over the past few quarters, not to mention the ratio of people that continue to see the domestic economy as getting worse than better. Gallup's most recent poll shows 58 percent of surveyed Americans see the economy as getting worse compared with 36 percent who view it as getting better. Sounds more like a Band-Aid than a stimulant to me.

Perhaps most intriguing to me is how the $787 billion to be utilized by the American Recovery and Reinvestment Act (ARRA) of 2009 is being distributed - more like not being distributed.

To have a better picture of what I mean, take a look at Recovery.gov, the U.S. government's official Web site providing data related to Recovery Act spending. Per the Web site, as of Oct. 30, only $207.3 billion has been paid out, or roughly 26 percent of ARRA funds. Of the monies that have been paid out, the largest chunk has been in tax benefits, followed by entitlements. The Web site also goes on to say that 640,329 jobs have been created or saved "as reported by recipients" through Oct. 30. Now this raises more than a few flags.

Can the simple math that implies that roughly $322,000 has been spent to create/save each of those 640,329 jobs be right? With all this talk of a second stimulus, why has less than a third of the original stimulus been paid out? Of the funds paid out, how are the programs being awarded? I ask that last question because according to the report, the state of Michigan, which has an unemployment rate of 15.3 percent, has only had 22,513 jobs "created/saved" compared with New York that has 40,620 jobs "created/saved" but has an unemployment rate of 8.9 percent.

According to the most recent data from the U.S. Census Bureau, the domestic population is 304.1 million people with 138 million taxpayers. One has to wonder how the remaining $580.7 billion can be spent to create, not "create or save," but create jobs or if it's simply easier to give each person in the country $1,910 (or $4,208 per taxpayer) and let them spend it, invest it or use it to right-size their debt levels.

• Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at cversace @washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.